Overview

For decades, the use of savings and money market accounts have been the best strategy for safeguarding cash and earning a small amount of interest. However, over the past few years, interest rates have declined to nearly 0%. The current nominal rates for savings and money market accounts range from 5 to 100 basis points, depending on the bank or investment firm and amount of assets invested. In real terms though, these types of cash holdings are losing value against the change in prices of goods and services. As discussed in a previous article, "The Importance of CPI As An Investment Benchmark", investors can use the Consumer Price Index as a measure to determine the real return of any security holdings. From November 1, 2010 to October 31, 2012, CPI has increased by approximately 5.75%. During the same two year period, if an investor held funds in

Overview

Almost all investors use a benchmark to set expectations for a portfolio's performance. For equity securities, those benchmarks may include the major market indices (Dow Jones Industrial Average, S&P 500, Nasdaq, etc.). Treasury yields provide a benchmark for bond securities based on duration. Additionally, these measures may be blended to create portfolio benchmarks based on asset allocation (i.e., 60% stocks, 40% bonds).

However, the benchmarks above do not provide clarity as to whether the value of the portfolio is maintaining the purchasing power of its assets. Today, with gas approaching $4 a gallon nationally and the pending rise in the price of corn, are investments keeping up with the changes in the prices of goods and services we purchase?

Investors can use the Consumer Price Index [CPI] as one measure of an investment's purchasing power of goods and services. CPI is a monthly dataset of price changes in